I really like the general principles of the baby step method (minus the religiosity and lack of credit card use period), however, the tough love approach of Dave can sometimes be really off-putting and even demotivating at times. His daughter, Rachel Cruz, is a second generation baby-stepper, and she takes a gentler approach to teaching others about the baby steps. In her book “Love Your Life, Not Theirs”, she recognizes that the old adage of “keeping up with the Jones'” is still very much a reality and a struggle for many individuals. She touches on how to let go of that mindset and lead a fulfilled life without acquiring all this extra “stuff” through the progression of the baby steps.
If you didn’t see my previous post that explained Dave Ramsey’s first three baby steps, you’ll want to click over to read that post first. The first three steps are all about saving for emergencies, digging out of debt, and gaining a security net of a fully funded emergency fund. The last four steps are all about looking at the long-term financial future, and steps 4, 5, and 6 are completed concurrently.
Baby Step 4
This step assumes that your bills are current, you have a $1000 emergency fund, you are consumer and medical debt free, and you have a 3-6 month fully funded emergency fund. This baby steps requires that you invest 15% of your total income toward retirement. If you have a full-time and benefits-eligible job that offers a retirement plan, you should definitely contribute to your retirement plan to meet the full employer match. I 100% view this match as an additional salary–and me not investing up to the match is like burning my money. This match isn’t included towards your own 15% and is viewed as gravy on top of the mashed potatoes (extra).
I personally contribute 6% to my employer sponsored plan and invest what I can in a ROTH IRA. You contribute to a ROTH IRA with your after-tax income, which means you won’t have to pay income taxes on it once you’re ready to start taking distributions at retirement. If you’re not worried about lowering your income tax bracket, this is a really solid investment vehicle. Just know that your account is subject to loss and like any investments, should be tailored to your risk tolerance.
I’m on baby step 3b, so I’m not quite ready to hit the 15% mark toward retirement yet…but I’ll get there in a couple years, I hope.
Baby Step 5
This assumes that your four walls are covered, you have a $1,000 emergency fund, no consumer or medical debt, 3-6 months of living expenses in a fully-funded emergency fund, and have contributed (or continue to contribute) 15% of your total gross income. This baby step applies to individuals with children who wish to start a college fund or 529 account or Education Savings Account (ESA) for their kids. I don’t have children, and I’m not sure that I will…so this step doesn’t apply to me.
As someone who works at a university, I would definitely advise helping your child cut back expenses during those college years, if college is something they want to do. They can attend community college for the first two years for those general ed classes and then move on to the four-year school. Additionally, they can work toward reducing their living expenses while in school should they decide to not live at home. I know parents want to provide for their kids, and I 100% respect that…just don’t stretch yourself too thinly doing that and your own financial future be put at risk.
Baby Step 6
This assumes that your four walls are covered, you have a $1,000 emergency fund, no consumer or medical debt, 3-6 months of living expenses saved up, and are contributing 15% toward your retirement. This baby step is for individuals who are working to pay off their mortgage early. Similar to baby step 2, where you worked to pay down all your debts via the debt snowball method, baby step 6 is all about throwing your extra money at your mortgage loan…and thereby reducing the overall interest you’ll pay over the life of the loan. Dave Ramsey and Rachel Cruz are big advocates of paying a 20% downpayment and doing a 15-year mortgage that takes up no more than 25% of your total income. Although that isn’t the case for everyone–and probably won’t be for me–the idea behind this is to have paid off your mortgage before your term is over.
Baby Step 7
You’ve got your emergency funds saved up, you’re debt free, you contribute to your retirement account, and you have no mortgage. This baby step is the pinnacle of all baby steps. You now get to build wealth and give. Your money is yours (mostly), and you can do whatever you want with it (within reason). If you make it here, you likely have built a lot of really good financial habits, so you’ll still be responsible with your money–but hopefully at this point, you’ll be able to let loose the reins and continue to enjoy your life.
“Live like no one else so later you’ll be able to live like no one else.”
Someone who wants to take on these steps will likely have to lead a life where they appreciate and can find joy in simple things…like eating a meal you’ve prepared yourself, or by bragging about finding a dress with pockets for $5 at a thrift store. That doesn’t mean you have to wait until the steps are done to start enjoying your life, it just means that you shift your mindset to find joy in things that aren’t necessarily material–like hanging out with your crew or spending time with your loved ones. You focus more on memories and experiences rather than stuff…and those experience don’t have to be expensive either. At times living the baby step life may seem a bit restrictive, but a handful of years of gazelle intensity now will mean a more solid financial future for the years to come.